Mexico proposes sweeping social program changes

Published on NewsOK Modified: September 8, 2013 at 11:01 pm •  Published: September 8, 2013
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MEXICO CITY (AP) — President Enrique Pena Nieto proposed sweeping changes to Mexico's social programs Sunday, laying out a plan for the country's first nationwide pensions and unemployment insurance to be financed in part by cutting tax loopholes for big business.

Pena Nieto's proposal had originally been billed as solely an overhaul of the tax system, and it would cut most of the industry-specific tax loopholes written into Mexico's tax codes over decades.

But in his announcement, Pena Nieto went much further. He proposed the country's first carbon tax on fossil fuels used by industry, a levy often touted as a way to combat climate change. He also called for a tax on soft drinks, which he said is needed to combat Mexico's high rate of obesity.

"The tax reform is a social reform," Pena Nieto said in a speech at the presidential residence announcing the plan.

He said he would allow slight deficit spending in 2013, and a 1.5 percent-of-GDP deficit in 2014, to spur the flagging economy, offer incentives to lure the 60 percent of Mexicans who work in the "informal" sector into tax compliance, and create a stabilization fund to save excess tax revenues from boom years for use during lean times.

Some Mexican local governments, and particularly Mexico City, have experimented with small supplementary payments to the unemployed and people older than 70, but the country as a whole has not had unemployment insurance and it now has a patchwork of pension plans. A privately managed individual retirement system instituted in the 1990s includes only a minority of workers, most of whom have built up only very small balances in their accounts.

Pena Nieto did not provide specifics of the social program plans or tax changes, but said that "those who have more income will pay more." The proposal includes a slight income tax increase for top wage brackets.

He proposed to institute taxes on capital gains and dividends, but in a move sure to please smaller businesses, he also pledged to abolish the unpopular alternative minimum corporate tax as well as a tax on cash deposits at banks.

The proposals must be approved by both houses of congress and a majority of state legislatures because they involve constitutional changes.

Seeking to spur specific industries, Mexico over the decades has granted special tax deferments, depreciation allowances, tax consolidation and other benefits to companies.

"Those privileges that have no reason to exist will end," Pena Nieto said, while predicting his plan would boost the government's tax revenues by 1.4 percent of GDP in 2014 and 3 percent by 2018.

Mexico's long-coddled big business sector appeared to bear the brunt of many of the changes. But industry isn't likely to get much sympathy in a country with enormous income disparity — Mexico is home to the world's richest man, telecom magnate Carlos Slim, while nearly half the population lives in poverty.

"I think there are very positive things, especially on the social program side, but what we see in the (proposal) to increase tax revenues by 1.4 percent, well, that will basically be paid for by the private sector," Gerardo Gutierrez, president of Mexico's Business Coordinating Council, told local media.

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